By Zheng Li and David Stanway
SHANGHAI (Reuters) – Chinese regulators should increase support to the economy and ensure sufficient liquidity in the financial system, said Vice Premier Liu. He suggested that Beijing soon put forward further measures to boost growth in the face of rising US trade pressure.
Beijing has many policy tools and is able to deal with various challenges, Liu said at a finance forum in Shanghai.
Despite numerous supportive measures and political easing since last year, China's cooling economy is still struggling to get back on track, and the sudden escalation of tensions between the US and China last month has sparked fears that a wholesale trade war could trigger global action Recession.
Liu's comments came one day after data showed that credit growth in China was weaker than expected in May, confirming market expectations that more monetary easing is needed. Factory activities declined in May and imports fell the most in nearly three years, highlighting weak demand.
"There is some external pressure at the moment, but this external pressure will help us boost our confidence in innovation and accelerate the pace of high-speed development," said Liu, who is also the negotiator in the US and China's trade talks.
The government will introduce stronger measures to promote reform and opening up, Liu added.
China People's Bank Chief Yi Gang said last week that there would be "huge" scope for policy adjustments should the trade war deteriorate.
"We have a lot of room for interest rates, we have plenty of room for the required reserve ratio, and I think the room for adjustment for the Fiscal and Monetary Policy Toolkit is enormous," Yi said.
China Daily announced on Thursday, citing economic experts, that it would adjust its supply of money and credit over the coming weeks, including interest rate cuts or reserve requirements to counteract "downside risks" should trading tensions escalate.
Further cuts in banks' reserve requirements (RRRs) were expected earlier this year, especially after the trade conflict escalated last month. Both sides raised tariffs on the other's goods and Washington is threatening more.
Last month, the PBOC stepped up its efforts to boost credit growth and business activity, announcing a three-step reduction in reserve requirements for regional banks to reduce the cost of financing small and private businesses.
Since early 2018, six RRR cuts have been made.
However, unlike earlier downturns, the central bank has so far been reluctant to lower key rates. Analysts believe that more aggressive measures are being held back, as it is feared that such a move could create a mountain of debt left over from earlier stimulus measures.
Greater easing could also trigger capital outflows and increase pressure on the US dollar, which has fallen nearly 3 percent against the US dollar since last month's flare-up.
Sources told Reuters in February that the PBOC considered a rate cut as a last resort. However, some analysts believe that one or more cuts are likely if the trade dispute gets out of hand and the US Federal Reserve begins to lower its key interest rates, giving the PBOC more leeway.
China Daily, citing experts, said financial institutions were faced with a shortage of liquidity in June, and authorities wanted to accelerate loan growth to meet economic growth targets.
Beijing has set itself a growth target of 6 to 6.5 percent this year, down from 6.6 percent in 2018, the slowest expansion rate the country has seen in nearly 30 years.
Bank of America analysts Merrill Lynch (NYSE 🙂 believe that China's GDP growth could drop to 5.8 percent this year and 5.6 percent in 2020 as the trade war intensifies.